What is a PPP project?

PPP(Public-Private Partnership), also known as PPP mode, is a project operation mode in public infrastructure. Under this model, private enterprises and private capital are encouraged to cooperate with the government and participate in public infrastructure construction.

Project PPP mode is an optimized project financing and implementation mode, which takes "win-win" or "win-win" of all participants as the basic concept of cooperation. Its typical structure is that government departments or local governments sign franchise contracts with special purpose companies set up by the winning bidders through government procurement (special purpose companies are generally joint-stock companies composed of construction companies, service management companies or third parties that invest in projects), and special purpose companies are responsible for financing, construction and operation. Governments usually reach direct agreements with financial institutions that provide loans. This agreement is not an agreement to guarantee the project, but an agreement to promise the lending institution to pay the relevant fees according to the contract signed with the special purpose company. The agreement enables special purpose companies to obtain loans from financial institutions more smoothly.

Mode characteristics of public-private partnership

First of all, PPP is a new project financing model. PPP financing is a project-oriented financing activity and a form of project financing. Financing is mainly arranged according to the expected income, assets and government support of the project, not according to the credit of the project investors or sponsors. The direct income from project operation and the benefits transformed through government support are the sources of funds to repay the loan, and the assets of the project company and the limited commitment given by the government are the security guarantee of the loan.

Second, PPP financing mode can allow more private capital to participate in the project, improve efficiency and reduce risks. This is exactly what the current project financing model encourages. The government, public departments and private enterprises cooperate in the whole process on the basis of franchise agreement, and both parties are responsible for the whole cycle of project operation. The operation rules of PPP financing mode enable private enterprises to participate in the preliminary work such as confirmation, design and feasibility study of urban rail transit projects, which not only reduces the investment risk of private enterprises, but also introduces the management methods and technologies of private enterprises into the project, which can effectively control the construction and operation of the project, thus helping to reduce the investment risk of project construction and better protect the interests of the state and private enterprises. This is of practical significance for shortening the project construction period, reducing the project operating cost and even the asset-liability ratio.

Third, the PPP model can ensure that private capital is "profitable" to some extent. The investment goal of the private sector is to seek projects that can repay loans and return on investment, and unprofitable infrastructure projects cannot attract private capital investment. Using PPP model, the government can give private investors corresponding policy support as compensation, such as tax incentives, loan guarantees, and giving private enterprises priority in developing land along the route. By implementing these policies, the enthusiasm of private capital to invest in urban rail transit projects can be improved.

Fourthly, PPP model can improve the service quality of urban rail transit on the premise of reducing the burden and risk of government initial construction investment. Under the PPP mode, the public sector and private enterprises jointly participate in the construction and operation of urban rail transit, and private enterprises are responsible for project financing, which may increase the project capital and reduce the asset-liability ratio. This can not only save the government's investment, but also transfer some project risks to private enterprises, thus reducing the government's risks. At the same time, the two sides can form a long-term goal of mutual benefit and better serve the society and the public.

References:

PPP-Cooperation between Government and Social Capital